Revenue Realized: Early Payment Discounts

Tim Nissen | Revenue Realized: Early Payment Discounts.

A method to impact working capital management is capturing early payment discounts, providing a valuable cash return to your enterprise.

A number of your vendors add contractual provisions for early payment, offered either when they’re aiming to reduce the recorded amount of their receivables outstanding, or are seeking an improvement in cash flow. Either way, there’s benefit in their sales discount for you and your company.

Early payment discounts can be a valuable facet of working capital management your organization can leverage to generate a higher rate of return overall, versus allowing cash to sit in low-yielding corporate accounts. These available discounts offer a significant annualized return that’ll put money back into your enterprise. It’s Accounts Payable’s opportunity to impact company profitability, while achieving cash flow objectives.

Discounts are offered by your vendors to motivate customers like you to pay sooner. Credit terms such as 2/10 net 30 enables you to deduct 2% of the amount owed on an invoice if payment is made within 10 days rather than paying the full amount in 30 days. You save 2% of the amount owed by paying 20 days early. Equated to cash, an $1,000 obligation with terms of 2/10 net 30 will be settled in full for $980 if paid within 10 days. If your company has adequate cash or a readily available line of credit, that 2% early payment discount for paying 20 days early, occurring 18 times in a fiscal year, equates to an annual return of approximately 36% – terms firmly in your favor.

Companies often have a difficult time processing invoices in a timely enough manner to qualify for the early payment discount. 10 days isn’t a lot of time. It’s imperative that good processes be established regarding where invoices are initially sent and how much time executives must approve invoices and return them to accounts payable for payment.

Aggregated industry research confirms the average invoice processing cycle is currently 12.4 days from invoice receipt until payment is scheduled, which misses the mark to capture early payment discounts by a mere 2.4 days. Further fiscally disappointing, only 9.9% of suppliers even participate in a discounting program. If this sounds hauntingly familiar, look to automate AP processing to quicken the pace.

Your opportunity is revenue realized: early payment discounts from your company’s vendors, with Process By date targets established using your enterprise content management system (ECM)-stored contracts with ECM integration. Cash flow objectives are met by automating payment scheduling through an ERP/accounting system integrated with an ECM system, according to vendor terms most favorable to you.

IntelliChief ECM provides a smooth, automated transition from the costly manual document management and workflow functions. Its industry-awarded real-time automated capture/imaging and content indexing of transaction documentation in any paper and electronic file formats, providing analytic visibility to vendor contract payment terms and payment scheduling. Its automation validates invoice information with vendor contract terms, assuring your designated payment schedule. It lifecycle-manages all related archived documentation, and facilitates and optimizing interdepartmental processes workflow, enabling easy access for AP staff and those approving payments (via desktop and mobile access).

With IntelliChief’s automation, you’ll streamline your workflow processes and reduce payment cycle time by an average of 80%, allowing you to meet any vendor’s sales discount timeline you choose.

A working example: a company utilizing IntelliChief ECM noted their early pay discounts achievement of USD$5.4 million in fiscal 2016. That’s admittedly a big number, though what would yours be? Probably significant to your scale.

For more, see IntelliChief ECM for Accounts Payable.